The Possible Consequences of Pursuing Outstanding Legal Fees

The Account Stated

In a typical case, the plaintiff law firm sues for unpaid fees. Defendant, the former client, answers and denies the fees are due and asserts at least one counterclaim based on legal malpractice.

The relationship may have extended over several months or years. The complaint will allege the fees sought are reasonable and the work done was necessary. The complaint will probably allege either the fees were explicitly or implicitly approved. If so, the law firm alleges the fees sought are for an “account stated,” or counsel is entitled to fees on a theory of quantum meruit. For an “account stated” to be established, there must be an agreement, either express or implied, from the retention of the account or invoice rendered that remains without objection for an unreasonable amount of time or generally prior invoices that were paid.

The client may contest there is an account stated by claiming he or she never approved the invoices or the work was unnecessary. The law firm may allege the client either approved of the invoices or failed to timely object after receiving them. In two matrimonial actions in which the attorneys sought and were denied summary judgment, the clients each claimed they signed the invoices to signify approval only under duress. The courts held that the former client's affidavit, alleging counsel told them work would not continue until the invoices were signed, raised an issue of fact as to whether the defendant “acquiesced in the correctness of the invoices.” Wand, Powers & Goody v. Yuliano, 144 A.D.3d 1017,__N.Y.S.3d__(2d Dept. 2016); Landa v. Blocker, 87 A.D.3d 719, 928 N.Y.S.2d 779 (2d Dept. 2011).

Counterclaim for Malpractice

The defendant's answer will frequently contain at least one counterclaim for malpractice. In order for the malpractice claim to be effective, the client will have to establish that “but for” the attorney's negligence he would have prevailed in the underlying action, the negligence was the proximate cause of the loss, and the client suffered actual and ascertainable financial damages. Base legal assertions of malpractice will not suffice and are not presumed to be true.

In one action, the law firm was not liable for legal malpractice in a matrimonial action after the client established the law firm negligently failed to timely respond to discovery demands. The law firm proved that plaintiff was not precluded from introducing certain evidence at trial after the discovery responses were provided during a deposition. Id.

Fiduciary Duty, Contract Claims

Courts look at claims of breach of contract and fiduciary duty to determine if they are duplicative of the cause of action for malpractice. One court recently permitted a cause of action for breach of fiduciary duty based on allegations that the attorney disclosed confidential information in the complaint to recover legal fees. See, Quinn Emmanuel Urquhart & Sullivan v. Avra Surgical Robotics, 158148/14 NYLJ 120277655 7840 (Sup., NY, decided Dec. 20, 2016).

Unconscionable Conduct

In an occasional case, the parties may agree to a new fee schedule or contingency fee arrangement during the representation. Courts will look at these revisions with special scrutiny. In In Re Lawrence, 24 N.Y.3d 320, 998 N.Y.S.2d 698 (2014), the Graubard Miller firm (Graubard) represented the defendant's wife, Alice Lawrence (Lawrence), and her children in estate litigation for more than 20 years after Sylvan Lawrence, a well-known real estate developer, had died. Lawrence maintained she was very sophisticated, “tough,” intelligent and knowledgeable about real estate and litigation. She claimed she managed her own investment portfolio and “'never' consulted with her attorneys or children about business matters but rather kept her own counsel and 'trusted nobody.'” Id. at 327-27.

After she unsuccessfully tried to negotiate a settlement directly with the executor's children, Lawrence complained to Graubard about the law firm's hourly legal fees to date, totaling more than $18 million. She requested that the fee arrangement be altered. The law firm suggested a contingency fee arrangement, a draft which the firm provided to Lawrence. After Lawrence and her accountant reviewed it, she suggested an additional paragraph that the law firm accepted.

The parties signed the agreement with a contingency fee of 40% of any proceeds collected. Soon after the contingency agreement was signed, evidence described as a “smoking gun” emerged, indicating malfeasance by the executor, and the estate settled for $100 million.

Graubard sued Lawrence in Surrogate's Court after Lawrence refused to pay her share of funds based on the revised retainer agreement. Lawrence then sued Graubard in Supreme Court, claiming that the revised retainer was unconscionable and sought its rescission.

After many appeals, the Court of Appeals held the agreement was not unconscionable, but stated the courts “give particular scrutiny to fee arrangements between attorneys and clients,” placing the burden on attorneys to show the retainer agreement is “fair, reasonable, and fully known and understood by their clients[.]” Id. at 336.

The court acknowledged that fee arrangements revised during the representation are to be reviewed “with even heightened scrutiny, because a confidential relationship has been established and the opportunity for exploitation of the client is enhanced.” It is the attorney's burden to establish the validity of the changed fee agreement. Id.

The court based its decision on a number of findings. It held that the new agreement was not procedurally unconscionable since the evidence showed Lawrence “fully understood” its terms. The court noted Lawrence was involved in “every detail” of her case, had submitted a draft of the new agreement to her accountant to review, and that the estate's expert witness testified that Graubard had provided Lawrence with “'a tremendous amount of detail'” concerning her claims, “including their likelihood of success and potential recoveries.” That expert confirmed that Graubard had given Lawrence “a lot” of the information she needed at the time the new agreement was being negotiated. Id. at 337-38.

To determine whether the revised retainer was “unreasonably excessive” and substantially unconscionable, the court looked “primarily” at the risk borne by the attorneys and the value of those services in proportion to the overall fee. The court determined that Graubard had considerable risk, since Lawrence frequently fired and threatened to fire her attorneys, and a client may terminate the representation at any time leaving the attorneys only to recover in quantum meruit.

The court also noted that the value of Graubard's service was to be judged not merely by the time devoted to the representation, but also by the result. Lawrence ultimately recovered $111 million. The court emphasized Graubard's diligent work in uncovering the “smoking gun” evidence. Although the Court of Appeals held that the 40% contingency fee agreement was not unconscionable, it was not complimentary about the parties' conduct.

Conclusion

The action for attorney fees is one in which all the parties' dirty laundry is aired. An attorney who sues for fees can expect to litigate a malpractice claim. If the fee arrangement is revised during the representation, the agreement is subject to heavy scrutiny to determine if the client fully understood the changes and whether the attorney's fees were out of proportion to the attorney's degree of risk and the result obtained.

***** Sue C. Jacobs is a member of Goodman & Jacobs. Howard M. Wagner, an associate at the firm, assisted in the preparation of this article. This article also appeared in the New York Law Journal, a ALM sibling of this newsletter.